UNIT ROOT TESTS in the PRESENCE of MULTIPLE BREAKS in VARIANCE

Soo Bin Jeong, Bong Hwan Kim, Tae Hwan Kim, Hyung Ho Moon

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

Spurious rejections of the standard Dickey-Fuller (DF) test caused by a single variance break have been reported and some solutions to correct the problem have been proposed in the literature. Kim et al. (2002) put forward a correctly-sized unit root test robust to a single variance break, called the KLN test. However, there can be more than one break in variance in time series data as documented in Zhou and Perron (2008), so allowing only one break can be too restrictive. In this paper, we show that multiple breaks in variance can generate spurious rejections not only by the standard DF test but also by the KLN test. We then propose a bootstrap-based unit root test that is correctly-sized in the presence of multiple breaks in variance. Simulation experiments demonstrate that the proposed test performs well regardless of the number of breaks and the location of the breaks in innovation variance.

Original languageEnglish
Pages (from-to)345-361
Number of pages17
JournalSingapore Economic Review
Volume62
Issue number2
DOIs
Publication statusPublished - 2017 Jun 1

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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